Sunday, June 24, 2012

The Reflexive Libertarianism of Mainstream Economists, as Applied to the Analysis of Conditional Cash Transfers

I haven’t been blogging at all in the last few weeks, and I shouldn’t be now, because I am racing deadlines to complete work on a forthcoming report on child labor for the ILO (International Labor Organization). In doing this, though, I’ve repeatedly come across the sort of economists’ tics that drive me crazy—and explain why I would never be at home in a mainstream economics program.

Consider the logic of conditional cash transfer (CCT) programs, which pay money to households in return for their agreement to make sure their kids attend school or receive health checkups. These have been roaring successes in just about every country that has adopted them: they reduce poverty, increase education and raise the living standards and future prospects of children. They are not without problems, of course, and I will discuss the shadows as well as the light in my report.

But back to the logic. If you are an economist, your first question is, why the conditionality? Why compel households to change the education and health decisions they make for their kids? Why not just give them the money and let them do whatever they want with it? You know the diagram: just giving away money has an income effect, allowing the households to migrate to a higher indifference curve, but imposing conditionality forces them to adhere to a particular threshold for education or health “goods” (substitution effect), which pushes them off their welfare-maximizing tangency and on to a low indifference curve. Economists go through many years of schooling in order to think this way reflexively.

If you are still an economist, you look for two kinds of answers. One is that there must a market failure somewhere. Maybe households are ill-informed. Maybe they don’t take into account the utility of children. Maybe there are spillover benefits to education and health not captured at the household level. Of course, if you are thinking along these lines, you will want evidence and not just speculation: show me the market failures. Quantify them.

The other answer is culture. Maybe the society in question is paternalistic toward poor people because it sees them as inferior, not capable of making their own decisions. Hence conditionality is either an expression of this prejudice or a sop to those who have it. When your core outlook is libertarian, every restriction on free choice looks like this.

Now suppose you aren’t an economist, or if you are you are an outlier. You don’t think the utility maximization model is remotely descriptive of how most people make most decisions, and you don’t think it is helpful to view education as essentially a consumer good. If you are like me, you think that most behavior is normative: people follow their crowd and largely do what the others do. Of course, on the margin you might do a bit more of this or less of that, but the general pattern is not something you decide on. You send kids to school not because you’ve given the matter thought and have decided that the present value of their future, educated earnings is greater than today’s opportunity cost, but because you and your kid are immersed in a sea of expectations about how much schooling is appropriate and how it reflects on both of you. (Even home-schoolers do not act in isolation; they are nearly always part of a subculture in which this is a normative option, and the way they go about it reflects these social influences.) Thinking this way makes you a strange economist, but a rather mainstream sociologist, social psychologist or historian.

The non-reflexive-libertarian view does not require a market failure or a taste for paternalism. It sees CCTs as policy initiatives to shift cultural norms regarding education and health. (And, no, trying to shift norms is no more paternalistic than choosing to not shift them. Welcome to the inevitability of politics.) Recipients of transfers can reasonably be asked to meet education and health conditions because child-rearing is recognized as socially necessary work, and it is equitable to pay people for it provided it is done in a way that meets societal expectations.

These things are much, much easier to understand if you don’t “think like an economist”.

It seems to me that the rationale behind these sorts of programs is very simple to explain even from the standpoint of neoclassical microeconomics. When we give cash to the parents of small children, we want them to spend it in such a way that it maximizes the utility of their children. However, since we are giving it to them and not to their children, we should expect that they will spend it to maximize their own utility. The imposition of conditionality is logical if society perceives that the parents' utility functions are sufficiently different from their children's that the cash will not be spent "properly." There's absolutely no need to resort to social norms in order to explain the logic behind this sort of policy. It is perfectly sound economics as well.

Jacob, let's go one level down. Suppose it's about the child's utility, and we have something like the "rotten parent theorem". If it's the child's current period utility, we can just ask him/her. (That's what the so-called child labor protagonist school wants to do.) But we don't. So it must be about future utility, which the child is not yet in a position to judge. But if this is the case, who judges? How do you know the parents are wrong if they think the child will be better off not going to school? Well, you could do a study of course. But no one has ever -- ever -- done a study to determine whether or under what circumstances specific levels of education are utility-improving over an appropriate time horizon. So you are overriding the parental judgment of child utility with....what?

I don't get it. The government pays people to make sure their kids attend school. And my employer pays me to make sure I show up for work. Why not just give me the money and let me decide what I want to do? Why should there be any conditionality attached to the exchange of money. I walk into a store and give the clerk some money and clerk gives me whatever he or she feels like giving me. Or nothing. Hey, this libertarian paradise is starting to sound like Forest Gump.